Spain has embarked on the path to recovery, but must continue with reforms, OECD says

29/11/2012 - Spain is immersed in a prolonged recession that has been compounded by the continuing crisis in the euro area. The path to recovery has been launched, but will require full implementation of reforms and some additional measures to restore confidence in the financial sector, redress public finances and bring down high unemployment, according to the OECD’s latest Economic Survey of Spain.

The report, presented today in Madrid by OECD Secretary-General Angel Gurría and Spanish Minister of Economy and Competitiveness Luis de Guindos, recognises the wide-ranging reform process now underway. However, it points out that adverse conditions will limit the short-term impact of reforms. Indeed, the Survey projects that the Spanish economy will contract by 1.4% in 2013, before returning to a 0.5% growth rate in 2014.

“Spanish authorities have launched a courageous reform programme to address the root causes of today’s crisis, and they should be commended,” Mr Gurría said during the Survey launch. “While uncertainty in the euro area and the continuing global economic slowdown complicates Spain’s path to recovery, we are sure that the country is moving in the right direction. The cost of economic reforms may be high today, but the pay-off will be a stronger Spain, better equipped to compete in the global economy.”

Among key reforms drawing praise in the Survey are substantial budgetary consolidation measures and the reinforcement of budgetary rules, as well as broad and deep reforms of the labour market and the banking sector. The OECD Secretary-General also welcomed the approval yesterday by the European Commission of the conditions for restructuring and recapitalising Spanish banks as an important milestone.

“We are already seeing positive developments and results, particularly in terms of restoring competitiveness and closing imbalances with Europe,” Mr Gurría said. “The cost of this consolidation may have been higher than expected, due to external conditions facing Spain, and unemployment remains unacceptably high, but there is no doubt that this process will bear fruit. Until then, every effort must be made to address the social impacts of the crisis and protect the most vulnerable,” he added

The OECD identifies three priority areas for future action.

The financial crisis needs to be quickly addressed. Rapid, orderly resolution of non-viable banks and recapitalisation of viable banks with capital needs is key, as planned in the Memorandum of Understanding agreed with the European Union on financial sector reform.

Action should be taken to ensure that the substantial amounts of hybrid capital and subordinate debt buffers share the burden of losses, especially when holders of these instruments are institutional investors. Reform of bankruptcy procedures would help shift resources from insolvent companies to productive use and could provide more effective relief for over-indebted households.

Confidence in public finances must be restored. The government should aim at meeting headline deficit targets. However, if growth is far lower than expected, a higher deficit is acceptable and automatic stabilizers should be allowed to operate. Newly reformed budgetary rules across all levels of government should be strictly implemented. Permanent budgetary measures needed to stabilize government debt should be spelled out.

The government should seek to avoid a disproportionate impact of the crisis on low-income households. Tax reform can further contribute to budgetary consolidation as well as wider environmental objectives. Further pension reform would improve long-term sustainability and improve incentives to move activity from the informal to the formal economy.

Addressing very high unemployment will require a broad range of reforms. More could be done to reduce labour market duality, notably by ending the marked differences in dismissal compensation between permanent and temporary employees. Abolition of the legal extension of collective bargaining outcomes would offer companies greater flexibility to adapt to economic conditions.

Quick action is needed to improve the effectiveness of placement services, strengthening training, especially for the young unemployed, and tightening search requirements for workers receiving unemployment benefits. Action should also be taken to improve access to post-compulsory education, notably vocational education, and to better match skills with firms’ demands.

Further information on the Economic Survey of Spain is available at: www.oecd.org/eco/surveys/spain. You are invited to include this Internet link in coverage.